All eyes are on John Healey, the UK’s new finance minister

Andy Burnham began his tenure as the UK’s seventh prime minister in 10 years this week – but investors’ attention is now on John Healey, who was named Chancellor of the Exchequer late Monday.

Britain’s new finance minister faces a delicate balancing act between delivering Burnham’s potentially left-leaning agenda and calming financial markets.

As pressure mounted on former prime minister Keir Starmer, and Burnham, widely seen as a left-leaning candidate, emerged as the frontrunner to replace him, UK bond markets saw choppy trading as investors feared a possible financial meltdown.

Former chancellor Rachel Reeves focused on the UK government’s so-called fiscal rules, designed to tighten spending and borrowing.

In one of his last speeches as chancellor, Reeves praised his record of reducing public debt and promoting economic growth.

Official figures show that net public sector borrowing fell by a third on a year-on-year basis in June, with tax receipts rising while spending fell slightly. But borrowing in the financial year to June was the 10th highest for the April to June period since records began in the early 1990s.

But Reeves and Starmer have faced criticism for some of their fiscal policies, such as increasing National Insurance – a form of employment tax – for businesses, and downplaying welfare reforms to appease lawmakers.

And although net borrowing has fallen, the UK still has a debt-to-GDP ratio of around 95%.

Little is certain about Burnham’s incoming policy mix.

However, he has committed to fixing “big things,” such as social care, building record numbers of public housing, and providing “breathing space” for families facing the ongoing cost of living crisis. At the same time, he pledged to be a “pro-business” prime minister.

Burnham and Healey announced on Tuesday that they will reduce sales tax on household electricity bills from 5% to 0% from October, which will cost £850 million in 2026-27. They said it would be funded by scrapping Starmer’s Digital ID scheme, which was expected to cost £1.8 billion over the next three years.

“Many people have been struggling with the cost of living for a long time,” Healey said in a statement. “Cutting energy tax today will give families some breathing space on their debts, and provide some reassurance this winter.”

More details on his main goals are expected to be released later on Tuesday.

Healey, meanwhile, is expected to see defense spending as a top priority. His appointment as Burnham’s second-in-command comes just weeks after Starmer resigned as defense minister, citing his view that the government is “unwilling to do the services that the nation needs to defend the country.”

Last year, Starmer vowed to significantly increase defense spending, just before the NATO military alliance raised its military spending targets.

Bond markets were largely supportive of Starmer and Reeves’ successors, with UK government bonds, known as gilts, seeing huge volatility after headlines calling for their questionable roles in the past two years. Fears that Starmer will be forced out after May’s general election saw the government’s borrowing costs rise to their highest level since 2008.

Gilt yields fell across the curve on Tuesday morning, suggesting markets were muted by Burnham’s cabinet picks.

However, last month, the benchmark 10 years the yield is up about 19 points, and for the long term 30 years the yield added 21 basis points, both of which saw choppy trading at the moment. The latest moves can be partly attributed to the economic impact of the Iran war, which has raised borrowing costs in many major economies, but UK yields continue to trade at a premium to G7 peers.

Bond yields and prices move differently.

Speaking on CNBC’s “Squawk Box Europe” on Tuesday, George Godber, who owns £781 million. The Polar Capital UK Value Opportunities Fund, said “you can’t say much” of the latest moves in the bright markets to Burnham.

“Gilt moved 50 points in the last month … that costs the average family £80 more on their mortgage, so. [Burnham’s proposed] saving money for services is very little,” he said.

“We took the view that Burnham is likely to be left by Starmer, so it’s going to be high taxes, low growth, and that’s hard on the critical parts of the economy,” he said.

But Godber argued that, like his predecessors, Burnham may have had his cheap spending plans bolstered by the bond market.

“Look at the daily movement in the gilt market yesterday – when Burnham used the words, we will be more flexible in the financial rules, gilts. [reacted]so the gilt market will dictate their policy,” he said.

“If you have £3 trillion in debt, it’s yours [lenders] who dictates your policy. There may be a few magical trees trying to be planted outside of Number 10, but they won’t get away with anything unfunded.”

Kate Shoesmith, director of policy and information at the British Chambers of Commerce, told CNBC’s “Squawk Box Europe” on Tuesday that “the cost of making successive policy decisions has increased by 72%” for UK small and medium-sized businesses.

“There are some steps where we have to look again,” he said. “The huge cost of labor … how can we deal with that? Is it time to have a national insurance holiday if we want to hire young people under the age of 25? Does that give businesses breathing space?”

He urged Burnham and Healey to reconsider various measures brought in by previous governments, including those introduced in Reeves’ Autumn Budget 2024, which included a £40 billion tax hike.

“So the successive policy decisions, which of these can we change, and what are the new ways we should really think about?” Said the shoemaker.

Gareth Davies, UK minister for business and trade in the opposition Conservative party, told CNBC’s “Europe Early Edition” on Tuesday morning that the new government’s Autumn Budget will need to find about £5 billion ($6.7 billion) for defense spending.

“[Reeves] It has left a £4.7 billion hole in the defense investment plan,” he said. So it will be really interesting to see how both Burnham and John Healey manage their MPs, which has historically been a difficult task.”

In a note on Monday night, Citi’s European Aerospace and Defense Analyst Charles J Armitage said Healey is likely to be well received by the market as it is good for defense stocks.

But “as Chancellor, you will probably have a lot of spending needs, and you will be able to allocate money [to defense] remains to be seen,” Armitage said.

Some lawmakers renewed calls to issue defense bonds to finance defense spending after Healey’s nomination.

JP Morgan CEO Jamie Dimon also weighed in on UK politics this week. In an hour-long interview with Wilfred Frost released overnight, he said he wanted Burnham to succeed – but urged the incoming chancellor to focus on building a strong economy.

“I want to see the UK prosper,” he said. “But the UK, like everyone else and my country … you need a strong economy to do that. A strong economy will benefit all your citizens – just go around the world and look at what happens when bad policies destroy a country.”

Dimon added that he was thinking “Rachel [Reeves] you did a good job.”

“The new Chancellor will need good policies that will create growth,” he said. “So I pray that they will get the policy right … the government after the government has done wrong.”